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Guest blogger:Professor Brian Smith, Visiting Research Fellow at The Open University Business School, Adjunct Professor at SDA Bocconi in Milan.

When I was a young graduate trainee, I sometimes wondered how it felt to be one of those senior guys (they were almost always men then) whose word was law and who seemed to me to be all powerful. I imagined feelings of power and authority and looked forward to the day I’d get there. When I reached that level, those memories seemed innocent and naïve as my dominant feeling, and those of my senior peers, was that of frustration. Why, I wondered, was it so difficult to get anything done?

When I moved into academia, I was surprised and, to be honest, a little irritated that there existed a whole body of research that spoke directly to these frustrations of senior managers. Surprised because I considered myself a pretty well-read executive and irritated because if I’d known this stuff earlier it would have helped me get things done. The problem is, as with much management research, all the good stuff is wrapped up in jargon and published in journals that managers never get to read.

A good example of this work is institutional theory, generally acknowledged to be the creation of Philip Selznick. In essence, this body of work describes organisations like big companies as being confined by the values of their external environment. DiMaggio and Powell expanded on this, describing three sets of pressures: coercive (legal), normative (cultural) and mimetic (seeking to imitate). Their paper’s title, “The Iron Cage Revisited,” is a pretty good description of how many of my management colleagues felt.

When I first read this work, coming from a corporate background, the scales fell from my eyes. Some of the pressures had obvious manifestations (e.g. coercive regulatory pressures) but others only became understandable when I put my experience in the context of institutional theory. The hassle I had received from the doctors in medical affairs (I worked in the pharma and medical technology sectors), for example, or from the sales team, were obvious examples of normative pressures stemming from the sub-cultures of their professions.

And mimetic pressures were clearly seen in all the pressure to adopt ‘industry best practice’ that, whilst we justified it in rational terms, often seemed a senior management whim that we were forced to serve. This rationalisation of emotional whims is also discussed by the institutional theorists, who talk about ‘rationalised myths’ as a way firms maintain ‘social legitimacy’ in their business environment.

I now use institutional theory in my work trying to understand how firms compete. I’ve discovered that the jargon and journals aren’t the only reason this valuable knowledge isn’t used much by practising executives. The other reason is that they usually prefer simple, quick answers and institutional theory doesn’t do quick and simple easily. It needs thought and careful application. Take, for example, the pharmaceutical industry’s current problems with pricing and government pressure to reduce costs. To many of us in the industry, the picture of ‘big bad pharma’ painted by activists and pressure groups seems unfair and to neglect the contribution the industry has made to the incredible health outcomes we now have. If the industry had used the ideas of institutional theory, we would have understood the cultural pressures we face and predicted the situation we now face. As an industry, pharmaceutical companies have lost a lot of social legitimacy, which sounds academic until you realise that it’s the direct cause of the industry’s pricing and political activity.

So, whilst I try not to have regrets, I regret that I’d not learnt about institutional theory earlier. It would have made me a more effective, and rather less frustrated, executive. Still, if you’re an executive reading this, there’s still time for you. Brave the jargon, throw out your suspicion of the academic and learn some more about institutional theory. Or of course you could create a rationalised myth for why you don’t and stay in your iron cage.

Professor Brian D. Smith, is visiting research fellow at the Open University Business School and Adjunct Professor at SDA Bocconi in Milan, Italy. He y. He welcomes comments or question.

Guest blogger:Professor Brian Smith, Visiting Research Fellow at The Open University Business School, Adjunct Professor at SDA Bocconi in Milan.

Emerging practice in pharmaceutical industry offers new ways to improve the annual business plan review process.

The size and reach of pharmaceutical (pharma) companies varies greatly: from vast multinational global conglomerates to small start-up companies; from speciality firms to those spread across almost every therapy area. Despite this variation, our research shows that the annual business review is used almost universally in the industry to formulate and implement competitive strategy.

Despite the time and effort invested in these reviews, only a small minority of the companies we studied actually thought the process was valuable. By studying this minority, three valuable lessons emerge for the industry as a whole.

Lesson 1: The two sides think differently

Executives usually think in terms of sales, profit and return on investment (ROI) and justify their plan in that language. Business owners and CEOs think in terms of risk-adjusted ROI and evaluate a plan in terms of not only what it promises but also the probability of it delivering on that promise. This small but critically important difference in perspective explains the weaknesses of the business plan review process in most pharma companies.

By contrast, those unusual pharma company executives who have overcome this problem share a common way of thinking about business risk as a three-component model summarised in Figure 1.

Figure 1: The components of business risk

Lesson 2: Pay attention to sub-categories of commercial risk

Although technical and political can be important, it is the understanding and assessment of commercial risk that is crucial to pharma companies. To analyse commercial risk more effectively, it should be broken down into three further categories, as shown in Figure 2.

Figure 2: The components of commercial risk

This sub-division of commercial risk is important because it allows executives to a) focus their attention on whatever type of risk is most important to their particular business, and b) to then analyse that critical risk in detail.

We found that leading companies talk of each of the three categories as having multiple sub-components (see Figure 3). Market risk, for example, is a combination of risks associated with estimating total market volumes, market category shares and forecast growth rates. In the innovative markets where market risk is important, all of these estimates have wide margins of error and these are the primary cause of commercial risk. Share risk, by contrast, is important in mature markets and arises from the nature of the competitive strategy, especially how well it addresses market segmentation, targeting and positioning and how well it anticipates market trends. In the commoditising markets where profit risk is the focus of executives’ attention, the key issues are costs, prices and competitive response.

Figure 3: The sub-categories of commercial risk

A lack of attention to any of these factors leads to commercial risk. In total, our research identified 15 sub-categories of commercial risk. Few companies managed all of them but the best companies pay close attention to those that are important to their particular business.

Lesson 3: Carry out Marketing Duo Diligence at two levels

The third lesson is to carry out a practical application of the risk perspective, which we named Marketing Due Diligence[i], to avoid a wasteful, often sub-optimal process. This works at two levels.

At the level of those who evaluate and approve business plans, business owners and their CEOs use these ideas to assess business plans rigorously and methodically. The Marketing Due Diligence process then becomes a kind of diagnostic tool, systematically revealing any areas of the plan in which commercial risk has not been well understood or managed. By focusing according to product category life cycle stage, boards find this approach not only effective but efficient, allowing them to prioritise their time onto parts of the plan where poorly-managed risk is most likely to be found.

At the level of those who prepare and present business plans, executives in various commercial functions use these ideas to guide their planning process, in effect using Marketing Due Diligence as a kind of checklist to ensure what they present to the board is as strong as it possibly can be and, importantly, is expressed in the language of risk-adjusted ROI. Again, product category life cycle stage allows prioritisation of executives’ efforts but each of the three main components of commercial risk can be managed better and mitigated.

Professor Brian D Smith researches strategy in pharmaceutical markets at The Open University Business School and SDA Bocconi, Italy. He welcomes comments and questions both here and at brian.smith@pragmedic.com

A rich pipeline of potentially marketable drug compounds is the lifeblood of the pharmaceutical industry and the first thing that used to come to mind, when as student, I was applying to companies for jobs. When I was labouring day and night against a lab bench playing paper chase, the thought never occurred to me that one day I would be following the advice of my academic teachers, that is to swap a career in academia for one in a drug company. They warned me that any new ideas I had would have to mould into more restrictive and complex norms, depending on company size. I would have to adapt to corporate culture less forgiving to sudden bursts of innovative trial and error approaches to decision making. But, the magic world of reinvested profit back into research for new drugs could have put the worries of any researcher for funding to rest.

Of course, in my mind, innovation was only synonymous to successful drug development.

I later discovered only part of this held true. It is not enough that a company needs to invest in a costly 15 years of research to decide on a potential new drug. Marketing a newly developed compound is a bumpy road, not for the faint-hearted. It involves many issues; an increasingly demanding regulatory approval process, and a short five-year period in which the compound needs to render profit for the company before patent expires. All bets are on, in a rapidly changing external market which pushes for more at a lower cost, driven by growing generics competition.

Thus, examples of innovation are contingent on dynamic market demands.

Optimising Research & Development (R&D) spending: The industry has been blamed for falling behind on drug design innovation1. Small biotech companies, which are beginning to take over from big corporations in producing high quality, innovative compounds targeting niche disease areas, do so due to their focus on science, agile decision making processes, inspired talent management and rigorous financial restraint1. As one example, Vertex is on its way to marketing yet another compound shortly after the launch of a first innovative therapy for cystic fibrosis in Europe, while partnering with GSK and Jansen to market new Hepatitis C compounds2.

At the same time, bigger companies seem to be in a state of constant regrouping, where there is room for improvement in communication and in the development of the right mixture of metrics, which can boost productivity and reduce costs. As Knott hints at in her recent HBR article last May3, one reason why ‘R&D spending does not correlate with market value or growth’ lies in the way companies fail to measure productivity of the R&D. Even with universal, uniform and reliable metrics based on Edwards Demings’ TQM system, Knott points out that big companies will have to reduce R&D costs to make up for patent erosion, while simultaneously managing for increased R&D productivity. But for most, the new metrics system may actually justify greater R&D budgets3. While R&D spending optimisation seems to be work in progress3, there are still some successful open innovation strategies like Merck’s initiative of employee idea crowd sourcing to encourage such transformational innovations 3,10.

Is continuous innovation key to success within the pharmaceutical industry?

Companies that are doing better, tend to follow a mixture of strategic imperatives coupled with optimal risk averse financial management in continuous innovation, e.g. polypill design or administering an existing compound in a new drug delivery system, like Ceglene’s Abraxane approved to treat breast and lung cancer4.

Technology boosts productivity at less cost: Business analytics also present a hot new technological innovation, useful in contributing to cutting costs and improving productivity across the value chain of new product development and marketing. For example, Vertex designs clinical trials in record time using analytical business tools to help minimise errors in trial design and consequently cut costs, optimising the probability of high quality end trial outcomes5.

Organisational restructuring to offset patent erosion: The more successful companies have followed what Christensen calls disruptive innovation strategy in organising a separate business unit, or independent subsidiary company, to continue marketing their own branded generics, e.g. Novartis’s Sandoz6. In that way, although the subsidiary is functionally and organisationally separate from the mother company, the profits are kept in house6. A hybrid of that strategy is to flexibly diversify business activity according to the needs of the market, as Abbott did after buying Piramal to start selling cheap, generic drugs in India­­7.

Marketing strategy optimisation: Fast and effective new customer segmentation and targeting can also be achieved by the use of social media platforms, an effective way of bringing the company closer to its customers and consumers. A social media platform developed to inform, educate and interact with patients was developed by Lilly & Co, which combined YouTube, Facebook and Twitter and was launched in September 20108, despite regulatory impediments that the company faced. Over the last 3 years, more than 74%9 of companies have adopted this addition to their communication strategy, thus bridging the gap between the company and its end-users, in the hope of drawing marketing and competitive intelligence insights and improving corporate image.

Pipelines may have helped thus far­6, but investors are not optimistic that results may be as encouraging in 2013. It may be that under extreme pricing pressures the innovation imperative for drug companies in Europe and the US seems impossible to tackle, while sales of new products hardly cover losses from patent erosion in a competing generics market and an external environment driven by regulatory and pricing pressures. Rather than a deviation from the classic Ansoff framework, Nagji and Tuff10 suggest that a winning strategy may be a combination of innovative approaches at the right equilibrium. Managing existing drug/expiries, expanding adjacent ‘new to the company’ business, and developing new drugs covering the ever growing epidemiological needs, especially in the emerging markets, within the same company, may be mandatory.

Total innovation management has worked for Technology and Telecommunications’ markets10. It may be the right survival tactic for pharmaceutical companies, as just having a pipeline of new drugs, just maintaining existing customers with face-to-face sales calls, just relying on marketing to cover for R&D delays, or selling in just Europe or the US, does not seem to cut it in today’s drug market.

Disclaimer: The views posted in this article are the result of personal reflective thinking on the already published articles, analyses and reports stated in the References; the current conclusions hypothetical and subject to change in light of new, openly published evidence. The author is currently an MBA student at The Open University and bears no relationship, commercial or otherwise, with the companies mentioned, which she has used randomly to exemplify innovation strategies.